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The story is as old as Hollywood. Boy meets girl. Illness threatens to take girl from boy. Girl gets better and boy and girl live happily ever after. Only in this case it was shopping center owners meet movie theater anchors. Theater chain bankruptcies force them to close theaters. Chains' financial picture improves and they once again begin signing leases for new theaters.

If it all sounds too rosy, that's because missing from the scenario is the fact that many theaters literally went dark — some 2,000 screens were shuttered in 2000 and 2001, according to The Hollywood Reporter. The dramatic timing couldn't have been worse — just as the nation's economy fell flat, landlords had several hundred large, blank multi-screen spaces to fill.

This twisted plot began in the early-1990s. Movie theaters were promoted as the “next big thing” as tenant anchors and the rock-solid foundation of the seemingly unstoppable trend toward entertainment retail. Unfortunately, while the entertainment trend indeed did not stop, some of the biggest theater chains in the nation did, at least temporarily.

Between late-1999 and mid-2001, at least a dozen chains filed for bankruptcy protection. They included major players such as Regal Cinemas, United Artists Cinemas, Edwards Theaters, Carmike Cinemas, Loews Cineplex and General Cinemas; AMC Entertainment managed to avoid bankruptcy but saw its stock drop precipitously.

Some chains emerged from bankruptcy stronger than ever, while others disappeared entirely, subsumed by the survivors. Though financial analysts give most of the surviving companies generally high ratings, shopping center owners are left questioning the ability of the theater industry to provide the kind of stable anchor needed to assure both access to financing and sustained foot-traffic and sales that will make their projects successful.

Back from the binge

The source of the theater industry's financial problems was easy to diagnose. Like Robert DeNiro in the last reel of Raging Bull, the film exhibition industry had grown fat and bloated. Between 1988 and 2000, the number of movie screens in the United States rose from 23,129 to 37,185, a 61% increase, according to the National Association of Theatre Owners (NATO) in North Hollywood, Calif. Unfortunately, the audiences did not grow at the same rate. NATO reports the number of tickets sold rose only 36% in the above period, leaving many theaters nearly empty.

By some estimates, there are still 25% to 30% more screens than the market can support. A report by PaineWebber Inc. in 2000 estimated that nearly 10,000 of the roughly 37,000 movie screens across the United States would need to close to return theater chains to profitability. In addition to the 2,000 already shuttered, Stuart Linde, an analyst with Lehman Brothers in New York, estimates another 1,700 screens will close by the end of 2003.

The closures have already helped the survivors' chances. Exhibitor revenue rose to $8 billion in 2001, from $7.7 billion in 2000, according to Encino, Calif.-based Exhibitor Relations Co. And the troubled chains are quickly reversing their downward trends. For the quarter ended Sept. 27, Kansas City-based AMC, which narrowly avoided bankruptcy, reported a net profit of $19 million based on operating income of $34.4 million, compared to a net loss of $5.5 million and income of $1.3 million for the same period in 2001.

Columbus, Ga.-based Carmike, which filed for Chapter 11 bankruptcy in August 2000, reported net income of $11.1 million for the quarter ended Sept. 30, compared with a loss of $2.1 million a year earlier. Its operating income nearly tripled to $15.1 million from $5.3 million in the same period. And Loews Cineplex, which filed for bankruptcy in February 2002, narrowed its net loss to $9.9 million for the quarter ended Aug. 31, compared with a $55.5 million loss a year before. Operating income shot up to $15.5 million from a $31 million loss a year ago.

Landlords left with space

But what's good for operators isn't necessarily good for landlords who own theaters that were shut down. As John Maxwell, an entertainment analyst with BNP Paribas in New York, points out, theaters are single-purpose assets that do not adapt readily to other uses. “It's difficult to subdivide them into other useful real estate,” he says. “About the only options are a very expensive demolition and rebuild or finding a new theater operator.”

In some cases, mall owners can find new exhibitors to take the space. With different programming and lower costs, local chains feel they can succeed where the majors failed. So, outside Atlanta, for example, Georgia Theater Co. of St. Simons Island, Ga., assumed control of the 12-screen Gwinnett Place Cinema from United Artists, promising upgraded theaters and improved service. In southeastern Florida, SunStar Theaters of Coral Springs took over the vacant Regal Cinemas theater at Sarasota Crossings Center to show second-run movies for a dollar. In Jacksonville, Fla., a local husband-wife team took over the Mandarin Corners 6 from Carmike and Jax 10 from Regal, vowing to give patrons only movies they want to see.

Whether the new operators will succeed remains an open question. In Maxwell's opinion, few will survive for long. As he puts it, “If it didn't work the first time, it probably won't work a second time either.” However, he adds, many will survive in the short run, particularly if ticket sales continue to climb as they have this year. According to Exhibitor Relations Co., audience numbers for the first half of 2002 were up approximately 6% over the first half of 2001. “But as soon as the audience stops growing, these theaters will suffer,” Maxwell warns.

Reuse options

If nobody is willing to take the theater on, reuse is the only option. But it's costly. According to Jay Shapiro, senior vice president for the theater and entertainment group at Trammell Crow in Boston, simply filling in the sloped floor to make a space suited for even basic retail use costs $12 to $14 a sq.ft. A 40,000-sq.-ft. theater would cost at least $500,000 to prepare for reuse.

Demolition costs at least as much and has a hidden expense, notes Nick Campo, a co-owner of the Marco Movie Theater and Beach Theater in Fort Myers Beach, Fla.. He says today's theaters typically cost $750,000 to $1 million per screen to build, with about half the amount going for equipment and interior fittings. So demolition means destruction of $5 million to $10 million worth of real estate, not to mention the additional cost of reconstruction for a new user.

Eric Snyder, senior vice president and director of corporate leasing for Chattanooga, Tenn.-based CBL & Associates Properties Inc., says about half a dozen of the developer's more than 150 malls lost movie theaters due to chain resizing. He says CBL examined alternatives to replace the vacant theater and was not hesitant about demolition when the need arose.

“In two or three cases, the theater was replaced by a big-box retailer,” says Snyder. “In one case, we knocked down the whole section and added a sporting goods store and food court where the theater used to be.” In a couple of malls, CBL did find new exhibitors to take the space, he adds.

Obsolescence has played a role in theater closings, too. In general, the theaters the chains closed were smaller and older, with fewer than 10 screens and sloped, rather than stadium, seating. In many cases, these units ultimately would have been shut down as outdated anyway, even if the major chains had not run into financial trouble. The bankruptcy process simply sped things along.

More megaplexes

Edwards, a Newport Beach, Calif., company that merged into Regal Entertainment Group following bankruptcy, closed the Vineyard Twin Cinemas and six-screen Nordahl Road Cinema in Escondido, Calif., in 1998 after opening an 18-screener in nearby San Marcos. The San Marcos opening also prompted closure of the 15-year-old, independently run Del Norte Plaza Movies 8 cinema; when Del Norte management failed to find a new operator for the theater, it rented the gutted space to LA Fitness Clubs.

As evidence of the trend toward greater screens per theater, in 1995 NATO calculates there were 26,995 screens and 7,151 U.S. cinema sites (excluding drive-ins), a ratio of 3.77 screens per theater. By 2001, the figures were 34,490 screens and 5,813 non drive-in sites, or 5.93 screens per theater. Among NATO's top 10 chains, which account for approximately 32% of all sites and 60% of all screens, the ratio for 2001 was 10.62 screens per theater.

At the 1998 ICSC spring convention, Charles P. Stilley, then president of AMC Realty, labeled any theater with fewer than 14 screens “obsolete.” At the same conference, Terrence L. Jackson, then senior vice president of real estate for New York-based Loews Cineplex Entertainment, predicted most smaller cineplexes would be “Gaps, HMVs or Applebee's” by 2003. The trend, they made clear, was toward larger theaters. The only smaller facilities to survive would be those that could be modernized and expanded.

If anything, the trend has only become more apparent since then. In fact, Linde says most theater bankruptcies could have been avoided if chains had been more aggressive about closing obsolete theaters while continuing to build megaplexes. He says they too often bowed to pressure from landlords worried about losing a tenant and communities upset about losing a local theater.

A sure sign of the attractiveness of the megaplex is the willingness of new developers to step in when such projects falter. Some planned projects could not be completed because bankruptcy limited access to financing. A few recently-completed projects had not yet turned a profit and were shuttered.

The most frequent replacements were strong regional operators such as Krikorian Premier Cinemas, a Redondo Beach, Calif. exhibitor with only 54 screens at the time. The company assumed responsibility for Edwards' planned 15-screen complex at Civic Partners' Vista Village redevelopment project in San Diego and took over operation of Edwards' 18-screen megaplex at the Buena Park (Calif.) Mall. Unlike its larger rivals, Krikorian was financially solid, with $100 million in the bank for development of an additional 92 screens.

Other smaller chains that came to the rescue of threatened cinema projects include R.C. Theatres Management LLP of Baltimore, which has 104 screens in five states, Muvico of Fort Lauderdale, Fla., which has 233 screens in six states, and Century Theatres Inc., with 850 screens in 11 states.

Not everybody believes in the megaplex story. Some theater industry professionals believe the big complexes are the real problem, even if it's not apparent to the major chains. Campo says there are not enough quality movies to keep any 20-screen theater profitable. By showing the same movie several times a day on two or three screens, they “use up” the audience during the first few weeks of a run, he says.

According to Campo, his theaters turned profits the past several years precisely because they were small, with six to eight screens. “If we'd had 20 screens we'd be gone by now,” he says. “We wouldn't have filed Chapter 11, we'd just be gone.”

Raymond Syufy, CEO of 61-year-old Century Theatres in San Rafael, Calif., says his company thrives by creating theaters based solely on market demographics. Century operates 850 screens in 11 states with another 250 screens under development over he next three years.

“Every market is different. You have to look at the population, demographics, competition. All that has an effect on the potential of the particular location. If there's enough audience left for you, be sure you design the right size theater,” says Syufy. “If there's only enough people to fill 12 screens, build 12 screens, not 20 on the assumption that bigger is necessarily better.”

Which is not to say, he emphasizes, that megaplexes are wrong. Century itself opened a 25-screen theater in Union City, Calif. last year and a 20-screener in the San Francisco suburb of Daly City this year. But it also introduced the CineArts division, which specializes in two- to eight-screen theaters targeted to fans of foreign and independent movies. In addition, it started building several 12-screen theaters.

A second key element, Syufy says, is control of the marketplace. “We only go into markets where we are or can be the No.1 chain. That gives us the assurance of getting the best movies, and if you have the best movies you get the biggest audience,” he says.

Based on the above philosophy, the company felt confident taking over six theaters from the bankrupt Pacific Theatres of Los Angeles. The acquisition gave Century a near monopoly in Marin County north of San Francisco, with seven theaters and 39 screens; independents have a total of six screens. “Even a two-screen theater can make money if you get the right films,” Syufy remarks.

Still driving traffic

Though theater closings have given landlords substantial grief, developers continue to pursue cinema complexes for their projects. Snyder calls CBL a “strong believer” in entertainment retail, with theaters still a critical component.

“We've got several new mall developments in the pipeline and have theaters slated to be part of those malls,” he says. “At other existing malls, we're working with theaters to expand or add stadium seating to make them state of the art.”

Certainly, cinemas, at least successful ones, seem to justify their presence in a shopping center. Cindy Ciura, vice president of marketing for Schostak Bros. in Southfield, Mich., estimates an 18-screen theater opening at the 870,000-sq.-ft. Fountain Walk lifestyle center in Novi, Mich., will draw 1.5 million customers annually. The facility will be operated by Emagine Entertainment Inc., a Troy, Mich.-based company with just two other theaters.

At the PruneYard in Campbell, Calif., a 650,000-sq.-ft. office, hotel and specialty retail center owned by Chicago-based Equity Office Properties Trust Inc., the summer opening of a seven-screen theater by Camera Cinemas has noticeably boosted other tenants' business. The small San Jose chain has only 16 screens and five theaters.

According to Jeff Greer, manager of the Rock Bottom Restaurant and Brewery at PruneYard, weekly sales at the 100-table eatery have jumped $700 to $1,000 since the theater opened. Arnold Carbajal, general manager of Hobee's Restaurant, says patronage has increased enough to keep his 50-table establishment open seven days a week, rather than five as in the past.

Will developers maintain their love affair with cinemas in the long run? If Paine Webber is correct and the industry needs only 27,000 total screens — 7,000 fewer than Linde projects will be open at the end of 2003 — mall owners may find themselves rethinking marriage plans.

For now though, many developers are keeping their options open. “The good news is the theaters have got financially stronger through consolidation and they're looking to make deals,” says Snyder. “And we'll be right there working with them.”

John McCloud is a San Francisco-based writer.

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